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Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Buy Big Bank Stocks and Give Regionals a 'Breather': Merrill Lynch (Update 2)

Stocks in this article: C JPM FITB USB

U.S. Bancorp

U.S. Bancorp of Minneapolis has seen its shares return 31% year-to-date, through Tuesday's close at $34.68. During 2011, the shares returned 2%, which was a strong showing, during a year in which the KBW Bank Index declined 25%.

The shares trade for 2.9 times tangible book value, and for 11.4 times the consensus 2013 EPS estimate of $3.05. The consensus 2012 EPS estimate is $2.85.

With a quarterly payout of 20 cents, the shares have a dividend yield of 2.31%.

The company has earned Penala's label as "best in class," with an ROA of 1.59% for the 12-month period ended June 30, and an ROE of 22.01%, which was the strongest among the 24 components of the KBW Bank Index.

U.S. Bancorp will report its third-quarter results on Oct. 17, with a consensus EPS estimate of 73 cents, increasing from 71 cents in the second quarter, and 64 cents during the third quarter of 2011.

Penala downgraded U.S. Bancorp to a neutral rating from a "Buy" rating, while lowering her price target for the shares to $35 from $37, "as we believe that USB's above average valuations will come under pressure based on a declining return on tangible equity that we forecast."

The analyst said that the stock is "trading close to their all-time high with USB at 2.4x YE13 estimated tangible book value , in line with our target TBV multiple and at 11.1x our 2013E EPS versus our target 11.5x P/E multiple, leaving limited upside potential in the absence of a significant upward revision to our EPS estimate.

Bank of America Merrill Lynch estimates that U.S. Bancorp will earn $3.10 a share during 2013.

Of course, Penala's rating and price target reflect expectations for the stock over the next year. For truly long-term investors, the company's quality speaks for itself. Penala said "we continue to view USB as a high-quality franchise given the demonstrated market share gains (loan growth has consistently beaten expectations), an established culture of expense control, better diversity from spread income, and the strongest return on tangible equity outlook in our universe.

USB Chart USB data by YCharts

Interested in more on U.S. Bancorp? See TheStreet Ratings' report card for this stock.

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